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HMRC internal manual

Capital Gains Manual

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Company reconstructions: shareholder: Section 110 Insolvency Act 1986 liquidations

A scheme of reconstruction can be used to break up an existing business into separate undertakings. Often this will involve the liquidation of the original company.

EXAMPLE

Inskip Enterprises Ltd (the original company) has ordinary share capital of one class only, owned entirely by the Inskip family. The company carries on 2 businesses of hiring pleasure boats, and building and repairing boats. It is decided the two activities should be separated into different companies.

The company enters into a scheme under Section 110 Insolvency Act 1986. As part of the scheme of reconstruction the original share capital of Inskip Enterprises Ltd is reorganised into A shares and B shares. The question of whether the conditions of Sch 5AA are met is considered after the reorganisation (paragraph 6 Sch 5AA).

The assets and liabilities of the boat hiring side of the business are allocated to the A shares. The assets and liabilities of the boat building side of the business are allocated to the B shares. Each shareholder now holds A and B shares.

Inskip Enterprises Ltd is placed in liquidation. The liquidator transfers the boat hiring business to a new company, Inskip Boats Ltd (a successor company). Inskip Boats Ltd issues ordinary shares to the holders of the A shares in proportion to their respective holdings. The boat building business is transferred to a new company Inskip Marine Ltd (a successor company) which issues ordinary shares to the holders of the B shares in proportion to their respective holdings. As the successor companies have issued ordinary shares to the holders of ordinary shares in the share classes of the original company which are involved in the scheme of reconstruction and to no other person the first condition of Sch 5AA is met. Taking the activities of the successor companies together they carry on the whole of the business of the original company: therefore, the third condition of Sch 5AA is met. As indicated at CG 52720, assume that the second condition of Sch 5AA is met.

TCGA92/S136 applies to the shareholders’ disposal of their shares in Inskip Enterprises Ltd and their acquisition of the shares in Inskip Boats Ltd and Inskip Marine Ltd. TCGA92/S139 applies to the liquidator’s transfer of the two businesses to Inskip Boats Ltd and Inskip Marine Ltd. This is treated as a no gain/no loss disposal. However there may be a charge under TCGA92/S179, see CG45400+.